The Input Service Distributor (ISD) mechanism under GST enables businesses with multiple branches to centrally receive and allocate input tax credit (ITC) related to common input services. As per Section 2(61) of the CGST Act, 2017, an ISD is a registered entity that distributes ITC to its units based on usage.
It is important to note that the ISD mechanism is meant only for distributing the credit on common invoices pertaining to input services only and not goods (inputs or capital goods). Since the common expenditure is meant for the business of all units, it is but natural that the credit of input services in respect of such common invoices should be apportioned between all the consuming units. ISD mechanism enables such proportionate distribution of services amongst all the consuming units.
ISD vs. Cross Charge: Key Differences
ISD Mechanism: Used for distributing ITC received from third-party vendors.
Cross Charge: Applies when the Head Office provides services to branches internally (e.g., in-house IT or HR services).
As per CBIC Circular No. 199/11/2023-GST (dated July 17, 2023), businesses had the flexibility to choose between ISD and cross charge until March 31, 2025. However, from April 1, 2025, the ISD mechanism becomes mandatory for distributing ITC related to common input services procured from third parties. Cross charge will remain applicable only for internally generated services.
Registration & Compliance
Businesses must obtain a separate ISD registration as per Section 24(viii) of the CGST Act.
Monthly filing of GSTR-6 (due by the 13th of the following month) is required to report ITC received and distributed.
The ITC distributed through ISD will auto-populate in GSTR-6A, GSTR-2A (Part B), and GSTR-2B of recipient units.
Penalties for Non-Compliance
As Per Section 21 of the CGST Act: Incorrectly allocated ITC must be recovered from the recipient unit, along with interest.
As Per Section 122(1) of the CGST Act: A penalty of ₹10,000 or an amount equal to the irregularly distributed ITC (whichever is higher)
